Question

Suppose you sell a fixed asset for $127,000 when its book value is $147,000. If your...

Suppose you sell a fixed asset for $127,000 when its book value is $147,000. If your companys marginal tax rate is 21 percent what will be the effect on cash flows of this sale?
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Answer #1

Solution :

Statement showing calculation of After Tax Cash Flow from the sale of the Fixed Asset :

Sl.No.

Particulars

Amount

1.

Sale value of the Fixed Asset

$ 127,000

2.

Less : Book value of the Fixed Asset

$ 147,000

3.

Loss on sale of Fixed Asset = (1) – (2)

-$ 20,000

4.

Tax Rate

21 %

5.

Tax savings on loss of sale of Fixed Asset

= ( $ 20,000 * 0.21 )

$ 4,200

6.

After Tax Cash flow from sale of the Fixed Asset

= Sale value of Fixed asset + Tax savings on loss of sale of Fixed asset

= $ 127,000 + $ 4,200 = (1) + (5 )

$ 131,200

Thus the After tax cash flow from sale of Fixed asset is = $ 131,200

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